Regulatory reform is needed to achieve the government’s new 10-point plan for a green industrial revolution, industry figures have argued.
Speaking to Utility Week, they called for the change processes for energy codes to be streamlined and for Ofgem to be given an explicit duty to push forward the decarbonisation of the energy system.
“There’s a bit a void that comes from the UK’s regulatory system,” said Kit Dixon, regulatory affairs officer for Good Energy. “It wasn’t designed to deliver transformational change, especially with Ofgem’s role as a traditionally economic regulator chasing low costs at all cost.”
He added: “They’re making some moves in the right direction. This year with Jonathan Brearley coming in as CEO they’ve published their decarbonisation action plan – they’ve put together a net zero advisory group – but it’s kind of off their own back. If they were given that mandate, then as an industry we’d be a lot better placed to make positive changes and move towards a decarbonised energy system.”
Dixon said this issue manifested itself in Ofgem’s work over recent years to change the way in which network charges are levied on generation and demand through two significant code reviews – one looking at residual charges and the other at forward-looking charges and network access arrangements.
“The initial aims of these workstreams were focussed entirely on cost reflectivity, which led to the removal of revenues and investment incentives previously available to small renewable generators,” he explained.
“So, what that means is we are gradually striping away at incentives for renewable generation because these workstreams are based on principles that don’t really factor in decarbonisation.”
Dixon continued: “In 2015, we saw the end of Levy Exemption Certificates so that was stripping away a little bit. We saw the gradual removal of triads. Recently, we we’ve seen the way balancing charges are levied change so decentralised generation – often small-scale renewable generation – can’t get the revenues they have previously relied on. The landscape is constantly changing which is bad for consumers and investors.
“If Ofgem had always had a strong mandate to consider decarbonisation, these changes may have taken place in a different way.”
With regards to energy codes and their governance, Dixon said: “They’ve been around for a long time and they are of a time when the industry was controlled by very few large organisations. And those organisations still have the same amount of power over those processes as they did before even though now there’s a whole swathe of other market participants who really aren’t being represented in that code governance system.
“What happens when a large industry participant such as a DNO or big supplier wants something changed, they can instigate a code modification process that will eat up lots of industry time over a period of six to twelve months, hand it to Ofgem, and it’s at that point that Ofgem can say this isn’t in line with our philosophy of bringing down costs – or as we would like to see it decarbonising the energy system – and they hand it back.”
“What we think should be able to happen is that industry and Ofgem get an earlier say on workstreams to really direct them in the direction of net zero.”
After reforms were recommended by the Competition and Markets Authority (CMA) as part of its examination of the energy retail market, Ofgem and the Department for Business, Energy and Industrial Strategy (BEIS) launched a review of energy codes and governance in November 2018. In July 2019, BEIS launched a consultation on proposed changes which concluded the following September.
“I think a lot of what they have suggested are positive changes but it’s not moving fast enough,” Dixon remarked. “We need wholesale change as soon as possible.”
“I think we need to look very carefully at what levers are being pulled in the industry and where incumbents vested interests are being protected to the detriment of the decarbonisation of our system by the labyrinthine nature of the regulatory approach that we currently have.”
Maxine Frerk, director of Grid Edge Policy and a former Ofgem partner, said an explicit duty on the regulator to meet the net zero target is not essential but would be beneficial: “I think people’s concern is that it’s left to them as to how they weigh net zero and the consumer and they focus more on the short-term bill impacts and less on net zero. I would be lining up with those people who say a change in their duties would be helpful in order to make clear the priority that needs to be attached to net zero.”
She said change is more necessary on code governance: “We all agree that it’s not fit for purpose. It’s something everybody has tried to grapple with for ages. I’m not sure that there’s quite such an easy fix on that.”
Frerk recounted: “When I was at Ofgem – that’s going back about four years now – I did some work to reform code governance. We lobbied hard for the CMA retail markets study to recommend changes.”
She said BEIS initially ignored the CMA’s call to action but eventually “woke up and decided maybe it was an issue and then you had the joint paper between BEIS and Ofgem that went back to the beginning again.”
“We’re worried about the process of code governance not being quick enough but the process of code governance reform is even slower,” added Frerk. “I kind of despair. It’s a big problem and Ofgem and BEIS working on how to solve it and make it more nimble just doesn’t seem to be the way to tackle it.
“Maybe everyone’s got to get industry working out for themselves of making each individual code a little bit more agile. And you have you got sandboxes coming through on some of the codes now which gives a little bit more flexibility there.”
Her concerns were shared by Flexitricity head of regulation Claire Addison who likewise lamented the slow progress of code modifications: “When incoming as CEO, Jonathan Brearley sent out that letter making explicit his commitment to decarbonisation so I don’t question their intent. I question the structure of the code modification process to deliver in this rapidly accelerating timeframe.”
She added: “For example, there was a change to Balancing Services Use of System charges that was floated back in 2017 and I became aware of it just at the time that I found out I was pregnant. And when they announced the change, I was sitting in lockdown with my two-year-old. We can’t have timelines where you can get a kid into nursery before you can get something quite simple through.”